Did I buy Apple to late (2K loss to date)? A look at their upcoming earnings

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When I bought Apple (AAPL) stock a few weeks ago for $187 ($16K in total) before the launch of the 3G iPhone, I was pretty confident about the prospects for the stock. I expected some short term volatility as it is a growth stock, but since my purchase it has fallen steadily to close at about $165 at the close of trading this week. So a loss of nearly $2,000 in less than a month. Even though it is a paper loss, it hurts. It also makes me wish I had waited to buy, but my research and to some extent market hype surronding stock, made me pull the buy trigger when I did.

I am going to hold on though, even as they report their fiscal third quarter earnings on Monday. Historically their stock price has been quite volatile around earnings and could easily shoot up or down 10% after the announcement. The consensus analyst expectation is a profit of $1.08 per share on revenue of $7.34 billion. Many analysts are expecting that Apple will beat earnings expectations, but that it may not provide a very optimistic earnings guidance. As stocks are priced based on future expectations, a guidance that does not line up with analyst expectations can result in the stock being severely punished. Here’s what a number of popular finance sites and blogs are saying about Apple’s upcoming earnings:

 

In a recent note to investors, Piper Jaffray analyst Gene Munster estimated sales of Mac computers rose 33 percent from a year ago, more than double the growth rate of the overall PC market. Munster said he also expected iPod units sold in the quarter to top estimates, but said that unit sales wouldn’t translate directly to revenue growth due to price cuts in the quarter. The analyst rates Apple “Buy” with a $250 price target. (Yahoo! Finance)

Shaw Wu, the top Apple analyst at American Technology Research, is focused on the company’s gross margins, which came in surprisingly low last quarter for reasons that were never adequately explained. He’s expecting gross margins of 33.5%, slightly higher than the company’s 33% guidance. But he notes that lower component prices last quarter did not translate into higher gross margins. “Investors chose to ignore this and gave AAPL a ‘free pass,'” he writes. “Given the macro environment, this quarter investors may not be so forgiving.” Peter Oppenheimer, Apple’s chief financial officer, has been known to send the stock into a tailspin by issuing numbers that are miles below Wall Street’s expectations. “We believe AAPL will likely continue its tradition of conservative guidance,” writes Wu, with considerable understatement. The question is, how conservative? If it’s the usual 9% or 10% below expectations, it shouldn’t make much difference. Anything lower could damage the stock. And if Oppenheimer offers guidance that’s better than expected, who knows, the stock might actually go up. (Fortune.com – Apple blog )

In an article entitled “Why I’m Shorting Apple Ahead of Earnings” in Seeking Alpha website this week, investor Ben Shuleva ticked off a litany of reasons he expects Apple’s share price to get punished after Monday’s earnings report, from cutbacks in education budgets that could eat into Apple’s back-to-school sales to the way Apple books iPhone revenues over 24 months, an accounting complexity the Street still doesn’t understand, no matter how many times Apple explains it. He does start the article by saying – “I will preface this report by stating that I am not bearish on Apple

long-term, and while I consider myself (in Graham’s terms) much more of an investor than a speculator, I am willing to make a significant bet that on a short-term basis, Apple’s share price will deteriorate. (Seeking Alpha)

 

The enthusiasm for the 3G iPhone should help offset any potential disappointment around guidance; however, we do remain concerned about the consumer spending environment in the US, Apple’s largest market,” writes Toni Saccanaghi, Jr., of Sanford Bernstein. Andy Zaky of the Bullish Cross blog (a great in depth analysis of the stock) says the hue and cry over its guidance should not impact shares. “Apple’s management has a pretty darn good idea of how much it will earn in any given quarter, and guides with bias toward managing expectations,” Marketbeat

While Apple’s report will garner a lot of attention, what will likely keep investors interested is what the company has to say about the outlook for its current, fiscal fourth quarter, which covers the company’s important back-to-school season. Keith Bachman, of BMO Capital Markets, said it is likely that Apple will give fourth-quarter estimates that fall below Wall Street’s consensus forecasts. He believes Apple will give a fourth-quarter earnings outlook of $1 a share, with sales of around $7.72 billion, or about 5% higher than its third-quarter sales. However, Bachman said that even though Apple’s outlook might at first appear disappointing, “We believe Apple can deliver results roughly in line with current estimates.” Bachman said this is because while Apple always sets the bar low for its fourth-quarter, it typically exceeds those estimates, and historically its fourth-quarter earnings and sales end up rising about 10% from the company’s third-quarter figures. (Marketwatch.com)
So from the above and all my other reading (and I have read a lot on this stock!), most analysts are bullish on Apple in the medium to long term, but feel the share price will drop in the near term as market expectations are too high. Perhaps I did buy too early after all. However, my horizon is 3-5 years and I will stick to my mantra of “Long term, Long term…investing = patience”. In talking to a colleague he even suggested I sell the stock before the earnings on Monday and buy it back the day after. Another strategy I could also use is to buy Apple put options, but for the amount of stock I have this is too expensive. So I think I will sight tight and go along on the Apple roller coaster ride.

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2011 and 2012 Capital Gains Tax Rates – Short and Long Term | Saving to Inve$t
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[…] are taxed like ordinary income at tax rates up to 35%. For example if Julia bought shares in Apple (AAPL) in February 2011 and sold them in November 2011, her gain or loss on the investment will be […]

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